Alternative Fee Arrangements: a Comprehensive Guide for Law Firms

The alternative fee arrangements (AFAs) have been the cause of much debate in the legal community during the past several years. Some law firms and attorneys have been very vocal proponents of implementing them or entirely switching to AFAs whereas others, who seem to be the majority, still feel uncertain if AFAs will help their bottom line or reduce their profitability.

One thing is certain, alternative fee agreements are here to stay since more and more clients, both large and small, are starting to proactively ask for the cost predictability, certainty, and transparency which they provide.

Our goal with this comprehensive article is to explain exactly what AFAs are, and what AFAs are not. Also, we will give an overview of the main types used, as well as the examples of law firms that have successfully implemented AFAs in practice.

What Does an Alternative Fee Arrangement Mean?

In the simplest terms Alternative or Special Fee Arrangements are agreements between a law firm and a client to provide compensation to the firm based on a structure other than hourly billing.

“AFAs are not about charging more than what an hourly rate might be — they are about charging an appropriate fee based on what value the client receives and how that client perceives value. Alternative billing should be based on what is fair and reasonable both to the client and the lawyer. Keeping track of time should be the lawyer’s measure of cost, not necessarily a measure of the value he or she is providing the clients in their legal needs.”

On the other hand, AFAs are also not about charging less than the hourly equivalent. If a client perceives a greater value for you finishing a work in one hour, than, say in 3 hours, who is to say your urgent work should not be priced higher than what would you ordinary price for the 3 hrs of work?

Value, it is in the eye of the beholder.

What Is and What Is Not an Alternative Fee?

There is definitely some confusion around what are and what are not alternative fee arrangements. Often law firms provide variations of the billable hour that are simply packaged in a different way.

One example is when you offer a subscription service. If a client is offered an annual or a monthly subscription with defined number of hours this can still be considered an hourly-based service. A true alternative fee arrangement is for example packaging the service as a product – delivering 3 documents drafts for $500 regardless of your time and efforts invested in the legal task.

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Types of Alternative Fee Arrangements

Fixed or Flat Fee

This is the simplest method of alternative pricing, it means charging for a predefined service at a fixed or flat rate. This fee might be negotiated for the whole service or just part of it. Great example is contract drafting, since some contracts are based on a template charging for the time it takes to complete it is pointless, so instead the lawyer charges a fixed fee of X dollars.

Contingent or Success Fee

Based on the results achieved, this fee requires a clear agreement as to what the desired results will be and what will not be covered under the fee arrangement. A common example in litigation might be a personal injury case based on a recovery. A common example in transactional work might be a success fee upon the closing of an offering or the funding of a loan.

Task or Unit-Based Billing

In this arrangement, identified tasks or components of the transaction are used to measure the fee. This arrangement may also be used in complex litigation or transactional matters where budgeting is required by the client.

Percentage Fee

Unlike a contingency fee, a percentage fee is based on a schedule of fees related to the amount involved in the matter being handled. The amount may be predetermined, such as a percentage of a loan amount being negotiated or the value of real estate being purchased, or it may be based on the amount of a bond issue. The percentage rate may be consistent or graduated.

Retrospective Fee Based on Value

This is different from most AFAs in that the exact amount of the fee is not known to either the lawyer or the client until the matter is concluded. The fee agreement should set forth the factors that would be considered in setting the final fee and in some instances a minimum or a maximum fee may be outlined in the engagement agreement.

Statutory or Other Scheduled Fee Systems

In some instances, the amount to be paid for legal services is spelled out in some statutory enactments, scheduled for prepaid legal service plans or by purchasers of legal services on a volume basis. Sometimes these are imposed, sometimes they are negotiated. Some reflect government-imposed social policies. Examples are social security cases, prepaid legal, insurance subrogation and uncontested foreclosures.

Hybrid Fee Arrangements

Blended Hourly Rate

In this hybrid of the hourly rate system, instead of specific hourly rates for individual fee chargers, one rate is applied to all hours billed on a matter regardless of whether it’s for a partner, associate or paralegal. This is often used in larger firms, where it has been negotiated as a fee arrangement by a corporate client.

Fee Collars

This means hourly rates with maximum and minimum fees quoted.

Fixed Fee Plus Hourly

A portion of the matter may be charged on a fixed or flat-fee basis, and a portion charged on an hourly rate basis, because parts of the engagement cannot easily be defined. In an estate planning matter, for example, documentation may be based on a fixed fee, while client meetings are based on an hourly fee.

Fixed Fee Plus Success Fee

This hybrid is used when the firm has a good understanding of the services required and the client and the lawyer are willing to share in the risks associated with the matter. An example might be a securities offering where a fixed fee is charged for the documentation and a success fee is charged if the offering closes.

Hourly Rate Plus Contingency

By combining hourly billing and a contingency factor the client and lawyer are sharing risks. Since a portion of the fee will be hourly (possibly at a reduced rate), the lawyer is guaranteed a minimum amount. An example might be a reduced hourly rate in litigation with a lower percentage contingency fee upon success.

Advantages of Alternative Fee Arrangements

Before we make the case that AFAs can provide significant advantage to your law firm we should mention the interesting results of Law Firms in Transition 2015: An Altman Weil Flash Survey. According to most lawyers, Alternative Fee Arrangements are here to stay – 81% of the surveyed people agreed that the increase of non-hourly billing methods is a permanent trend.

So how can a law firm take advantage of this trend and how can these alternative agreements be beneficial to the bottom line of your practice?

Advantage 1: Increased Profitability

Even though most middle and large law firms acknowledge the need of implementing alternative fee arrangements to be competitive, the majority do it reactively, only if a client asks for them.

However, most firms don’t have established process in calculating the value of their services in alternative means. When asked about profitability of the alternative fee arrangements compared to the standard hourly based billing the results are clear:

Conclusion: AFAs can increase profitability, but only if a law firm puts time and efforts in developing them!

Advantage 2: Delighted Clients

Client satisfaction is rarely the top factor that law firms aim for, but it is essential for creating long term and profitable relationships. Two things can be singled out as the main factors that can help increase their satisfaction from your service:

Predictability in legal costs which will help them create more accurate budgets and plan for costs in advance

Another proof for clients’ love for non-hourly billing is shown in the image above. It is part of a whole infographic made by theFirmex virtual data room 62% of the surveyed reported increase in AFAs’ growth. They say clients, not law firms are leading the adoption of alternative fee arrangements. The answers in the survey were given from general counsels and chief legal officers.

For more ways to develop great relationships with your clients you can get a digital edition of “Between Mediocrity & Success: A Lawyer’s Guide” where 25 of the world’s best legal consultants have shared their opinion and advice on improving your legal practice.

Examples in the Practice:

Moores was one of the most popular Australian law firms to get behind AFAs. Their take on it – Moores Agreed Pricing (or MAP) is based on pre-negotiated fixed fees.

“The benefit of agreed pricing is that the client is not the only one taking the risk of how long it is going to take. In the old model, however long it took was how much they had to pay. Alternative fee arrangements are a way of sharing that risk.” ~ Libby Klein, Principal

“We wanted to change to a new way of doing business, because we want to have long-term relationships who are the right fit for us.” ~ David Wells, Managing Principal

According to Moores agreed pricing benefit both the client and their firm:

Patrick Lamb is one of the most vocal supporters of AFAs. As one of the founders of Valorem Law Group, he has helped establish a company that is reaping the benefits of being one of the first to use Alternative Fee Arrangements to the fullest:

Service Guarantee – we can’t guarantee outcomes but like price, the quality of our service is another thing we can guarantee up front. If you think the quality of our service didn’t match what was agreed, let us know and tell us how you think that should be reflected in the price you pay.

“When you pay your lawyers for the time it takes them to do something, you get what you pay for – hours. In the meantime, you deter innovation and efficiency and incentivize complexity and redundancy.”

“Every case and every client is different. That’s why we customize our non-hourly fee arrangements at the beginning to make sure our fee is tied to achieving your end goal.”

There are many challenges when setting the fixed fee pricing for a client. Experience and detailed history of matters are essential part of the decision making process. But there are certain steps an attorney can go through to help them calculate the fixed fee. Theexperience of Bowen Buchbinder Vilensky has taught them what are the essential questions:

How unique and complex are the legal issues?

What knowledge, skills and experience are required?

Which lawyers will be assigned to the case?

What outcomes are you seeking and the difficulty of achieving them?

What is in dispute and what is at stake?

What risks are involved – both for you and us?

What will the case demand in terms of meetings, documentation, and communication of all kinds?

How urgent is your case compared with other work we are already handling?

Carlton Fields Jorden Burt provide several great examples from their practice on how they structured and set the alternative fee agreements depending on the different circumstances of the matters and their experience.

In one case they handled massive regulatory litigation by using a fixed fee, specifying the attorneys authorized to work on the matter before hand. If any other team member was needed to contribute they would charge standard hourly rates. From their prior experience, they knew how long the matter would run, and so were able to “cost out” the engagement by determining the opportunity cost for the dedicated lawyers’ time for the agreement’s duration.

By capping the number of individuals committed to the file, they capped both their cost in handling the file, and the client’s fees. Using a dedicated team that learned the case inside and out, helped them avoid duplicated efforts and other inefficiencies. For more examples you can visit their website.

The partners at WilmerHale argue that historical data should always provide the starting point for setting up fixed fees. Both firms and corporations should have detailed information on the past cost of different kinds of matters. They can use data-mining and analysis to determine reasonable ranges of cost for a wide variety of legal services. These services range from the simple to the complex:

A single project involving expertise and the lawyer’s judgment, but not much risk. For example – writing a handbook, creating form contracts or developing a compliance training program;

A repeating, routine tasks that again involve expertise and the lawyer’s judgment, but not much risk. Examples in this case are filing of patent, monitoring compliance with regulatory permits or handling routine labor matters;

More complex matters that involve judgment, expertise, and risk. Good examples are a series of venture capital financings or more complex multi party contracts for capital equipment sales;

A one-off, highly complex, high-risk matter – the transaction to double the company’s size with a target in similar lines of business or a patent-defense action in China.

You can read the full article published in Corporate Counsel magazine for more detailed explanation and why law firms must develop project management capacity.

The desire to provide their clients with budget certainty is what has driven Riverview Law to create a fixed priced model for their services. Riverview Law has been consistently putting the client and the value their provide first, turning the traditional billable hour model on its head.

In this brilliant article, Andy Daws, Riverview Law’s Vice President for North America, answers the five questions about fixed fees that everyone has in mind, but is too afraid to ask. For more detailed answers we urge you to go visit the article, here are the short answers:

Question: How on earth can you make money with fixed fees?Answer: Transfers the emphasis from inputs (hours) and overheads to outputs and value and put the client at the center of the equation.Question: Aren’t clients suspicious about it?Answer: Yes, but if you align your business model to clients’ best interests and then offer fixed fees, that same suspicion doesn’t exist.Question: What happens if you miscalculate?Answer: You take it on the chin, in the context of a long-term business relationship, figure out what you can learn from the experience and move on.Question: How can you possibly know if you’re making or losing money if you don’t have billable hours to track?Answer: It requires a bold decision and nothing short of reinvention in most cases. We’re simply looking at the teams’ activities from an entirely different perspective — a business perspective, focused on outputs and value.Question: Can you do this for litigation, too?Answer: Yes, but It all comes back to the business model and the data.

The Marque lawyers believe that the pricing should be individual and tailored to each client’s needs. They have a range of pricing models, such as:

retainers – this type of pricing model offers a fixed monthly fee under either a global retainer covering all the legal work or a specific retainer covering identified aspects of the work. The retainer fee gives a budget certainty and is calculated to equate the value provided.

fixed and capped fees – the Marque lawyers will quote and stick to a fixed fee for any transaction, litigation or other piece of legal work at your request. Alternatively, they will quote a capped fee which they’ll not exceed

litigation – alternatives to time-costing

litigation retainer: During the preparation phase of the litigation, Marque lawyers charge a fixed monthly retainer. In periods when nothing happens (e.g. when waiting for a hearing day), the firm doesn’t charge its clients at all during these months.

fixed fee litigation: the firm charges a fixed fee for the litigation matter, which is payable regardless of the outcome. This may be attractive in cases where there is a high likelihood that they will “go all the way” (i.e. to a final hearing).

Radiant Law also provide fixed price for each project they do. The law firm will agree a price with the client for a clearly defined scope of work. If the client then decides to materially change this scope of work, Radiant Law will agree a reasonable revised price with their client in advance.

On Radiant Law’s website you can find two great case studies in which they explain the process of setting fixed fees.

In the first case they spent 3 months working closely with a client to analyse the root causes of their capacity constraints and designed and implemented a number of bespoke products to support them. Before starting the work they created a number of distinct fixed-priced work categories and matters were allocated to these categories depending on the value, complexity and legal risks associated with the deal. This helped them allocate the most appropriate resources to each matter.In the second case study they helped a SaaS sales team streamline the process of closing contracts. The charge a monthly retainer for this service which helped the client calculate their legal costs for the year in advance.

To Sum It up: Alternative Fees Are Here to Stay

Alternative fee arrangements are a substantial part of the change, spreading in the legal industry. The forward-thinking law firms already offer them to clients, and benefit from the usage. Modern law firms believe the new way of exceptional client service and profitable law practice, is bound with alternative pricing methods.

If you’re wondering are these pricing changes sticking around, take a look at the image above. 80% of the asked firms think that non-hourly billing pricing types are going to be prominent part of the future of law. The alternatives to the hourly model are definitely here to stay.

Meanwhile, we’ll be glad if you share what do you think about the current and future state of alternative fees in the comments below!

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